PSP games are competing with too much:
1) PS2 games. PSP games are too similar to PS2 gmaes. People already own PS2 games, no reason to buy it on another system. Also, PS2 games don't really work on the go (loading times, battery life, no good stopping points) so why bother making PS2 games portable?
2) PS3 games. It's pretty clear where Sony has put its game development resources. So if you're going to make a game on a "new" Sony system, may as well go for the PS3.
3) DS games. When Nintendogs and Brain Training were released, the DS showed games that couldn't be done on any other console. Sony's response: a Neopets RPG.
4) Emulated games. The PSP is a great place to emulate games from other consoles, for free. And PSP games are easy to plop onto a memory stick as well. This happens on the DS as well, but there are waaaay more people who don't know how/don't want to anyway on the DS, versus the PSP.
5) PSP multimedia. People get the PSP for its multimedia functions, not for its games. Half due to its short battery life, half due to games from other consoles.
There is no such thing as a console war. This is the first step to game design.
